Construction co's face hardship

Johannesburg - A recent Ernst & Young report says that work in the SA construction sector is becoming more difficult to source and secure, increasing competition and making profit targets more challenging.

Global macroeconomic developments indicate that growth is set to slow across nations as demand for goods and services tapers off after an extended boom, it said. Locally, the economy is cooling as the impact of changing business conditions take hold.

The effects on the construction sector may not be immediate, says Ebrahim Dhorat, Director, Assurance at Ernst & Young, but are very real and will grow.

"Obviously existing construction projects are likely to continue to conclusion, keeping contractors busy even as the economy stutters. However, new business is and will be increasingly difficult to source and secure. Competition will increase in this leaner environment and maintaining steady profitability will become more challenging," he said.

The impact is being felt across the residential and non-residential sectors and by contractors in the civil construction industry, said Dhorat. "Similarly, the business confidence of architects, quantity surveyors, contractors, sub-contractors, wholesale and retail merchants, and manufacturers of building materials may yet be buoyant, but it is showing signs of moderation in growth."

"This moderation can be related to a keener tendering environment that may result in margin erosion and consequently, the profitability of builders, in current market conditions."

With the market beginning to show signs of pressure, Dhorat warns construction companies to exercise increased diligence and caution when considering tenders and evaluating contracts.

"Onerous contractual and legal arrangements, complicated regulation and fragmented and extended supply chains continue to present construction companies with significant challenges to deliver profitably," he said.

Dhorat suggests that construction contracts require robust management to ensure that profitability is not threatened by poor decisions or an imbalance between risks and rewards.

"Often, a drive to maintain momentum means that risk and issues may not receive the level of scrutiny and management focus they otherwise should; when the fundamental elements of a contract go unchallenged, the chances of failure - which may already be high - tend to increase."

He said that success depends on the ability to embed a comprehensive structure and culture of risk and internal control. "In certain instances which are likely to become the order of the day in the short to medium term, such as low financial returns, fierce competition from home and abroad and skills shortages, make the challenges faced by contractors even more daunting."

He said some of the "key factors" stakeholders in the sector need to contemplate in ensuring that the businesses important to them are most appropriately managed include appropriate cash flow and working capital forecasting processes, proper financial/operational risk management systems, choosing working partners carefully, effective governance and world class financial reporting.

- Fin24.com